Monday, January 25, 2010

No State-Law Market For "Fraud On The Market"

As we said last week, because it’s a Dechert case, we can’t comment directly on Clark v. Pfizer, Inc., 2010 WL 163583, slip op. (Pa. Super. Jan. 19, 2010). However, we were sufficiently inspired by what's in the opinion that we thought this would be a good time to put in our two cents worth about one of the theories that the Clark plaintiffs pursued: "fraud on the market."

As defense lawyers, we want to do our part in killling off this pernicious import from federal securities law. So we decided to take an in-depth look at all of the the precedent that rejects application of a “fraud on the market” reliance presumption to state-law claims.

Just to make sure that everyone’s with us, briefly “fraud on the market” is a doctrine that waters down fraud (and, plaintiffs would like to say, other liability theories based on claimed misinformation) by presuming reliance in certain limited circumstances. SeeBasic, Inc. v. Levinson, 485 U.S. 224 (1988) (4 justice majority of 7-justice court). It's not a state law claim - the Supreme Court has never applied a "fraud on the market" presumption to state law even in securities cases.

The presumption arose because the Supreme Court bought a questionable proposition – that securities markets are “efficient” and "developed." in other words, because there are so many participants in national stock markets, and those participants have such a voracious appetite for information, then anything about a particular stock is essentially instantaneously reflected in that stock’s price. Because of that (rather questionable) conclusion, any plaintiff in a securities fraud suit is “presumed” to rely on any material disinformation.

That's the theory. In practice, however, what “fraud on the market” is really all about is class actions – reliance is ordinarily considered an individualized issue that's kryptonite to the supposed "superman" of class actions . Without “fraud on the market,” there probably wouldn’t be very many securities class actions. Conversely, if plaintiffs could import the “fraud on the market” presumption of reliance into non-securities contexts – such as consumer fraud/common-law fraud/warranty litigation against our drug/device clients – an invasion of class actions would follow like night follows day.

It’s hardly surprising that, because we don’t want class actions certified against our clients, we’re not big fans of “fraud on the market,” and we want to remain see it tightly confined to securities litigation (indeed, abolished altogether, if we were kings of the world).

So far our side's been pretty successful (as in Clark). In the interests of maintaining that success, we offfer here a state-by-state break down of the precedent refusing to adopt “fraud on the market” or similar presumed reliance theories to state-law (not federal - no RICO or antitrust cases here) causes of action – everything from product liability to consumer fraud to state securities and other statutes. A lot of the cases reading "In re [fill in the blank] Securities Litigation" are cases refusing to apply "fraud on the market" to pendent state law claims, whether or not the decision applied that theory to the federal causes of action.

We remind defense counsel to use this chart with appropriate caution. In particular, there's some contrary precedent, maybe a dozen or two cases nationwide. It mostly falls into two categories: (1) interpretations of state securities law statutes, and (2) older federal cases, involving tag-along pendent state claims from the era of "certify first and worry later" that existed prior to the Supreme Court's crackdown on class actions in the mid-1990s. Adhering to our policy of not doing the other side's research for them, we don't include it here. Just be aware that there are some stray adverse cases out there, and research accordingly.

Second, we don't claim to have comprehensively researched presumed reliance theories other than "fraud on the market" – it took us bloody long enough as it is – but we've included whatever we happened to encounter along the way. There may well be other cases rejecting presumed reliance claims that we didn't find if they didn't use the magic words "fraud on the market."

Everybody except lawyers can stop reading now, since what follows is really dry: a list of the cases, organized by the law of the jurisdiction, that have refused to apply presumed reliance theories (mostly "fraud on the market"), in state law actions of various kinds. We apologize for not categorizing them by the precise claims involved, but you defense lawyers out there have to have something to justify billing your clients for.

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This blog contains the personal views of the Blogging Team identified below (and of any authors of guest posts) concerning various topics that arise in the defense of pharmaceutical and medical device product liability litigation. Please read the DISCLAIMER about the nature of this blog, and understand that you are accepting its terms, before reading any of the posts here.

Blogging Team

James M. Beck is Counsel resident in the Philadelphia office of Reed Smith. He is the author of, among other things, Drug and Medical Device Product Liability Handbook (2004) (with Anthony Vale). he wrote the seminal law review article on off-label use cited by the Supreme Court in Buckman v. Plaintiffs Legal Committee. He has written more amicus briefs for the Product Liability Advisory Council than anyone else in the history of the organization, and in 2011 won PLAC's highest honor, the John P. Raleigh award. He can be reached at jmbeck@reedsmith.com.

Stephen McConnell has authored articles and chapters on product liability (though nothing as snappy or authoritative as Beck's book) and has tried drug and device cases that managed to evade the pretrial gauntlet. He is a partner in the Philadelphia office of Reed Smith and can be reached at smcconnell@reedsmith.com.

Michelle Hart Yeary is a seasoned products liability litigator who focuses on attempting to bring order to the chaos that is mass torts, concentrating on the practicalities and realities of defending coordinated and multidistrict litigation. She is counsel in the Princeton office of Dechert LLP and can be reached at michelle.yeary@dechert.com.

John J. Sullivan is a products liability and commercial litigator, having authored articles on mass torts and securities litigation and presented on trial advocacy. He is experienced in mass tort litigation, with a particular emphasis on scientific and regulatory issues, as well as having experience in complex commercial, securities class action and corporate governance litigation. He is a partner in the downtown Manhattan and New Jersey offices of Cozen O'Connor and can be reached at jsullivan@cozen.com.

Eric L. Alexander is a partner in Reed Smith’s Washington office. He has spent almost his entire career representing drug and device companies in product liability litigation from discovery through motions, trials, and appeals, usually on the right side of the v. He is particularly interested in medical and proximate cause and the intersection of actual regulatory requirements and the conduct that plaintiffs allege was bad, which covers quite a bit. He can be reached at ealexander@reedsmith.com.

Steven J. Boranian is a partner in Reed Smith’s San Francisco office, where he focuses his practice on representing drug and medical device companies in product liability and other kinds of litigation. He has handled drug and device matters from pre-litigation demands to appeals and all points in between, with particular interests in “mass” proceedings and class actions, to the extent the latter should ever be allowed in the drug and medical device context. He can be reached at sboranian@reedsmith.com.

Rachel B. Weil is counsel in Reed Smith’s Philadelphia office. Except for a brief, misguided trip to the “dark side,” Rachel has spent her whole career defending drug and device manufacturers in product liability litigation and in government actions arising from such litigation. While she laments the single-plaintiff drug cases of her youth, she loves nothing better than a good mass tort. She can be reached at rweil@reedsmith.com
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